The Repercussions On Small Banks And Small Businesses Of Bank Capital And Loan Guarantees

Small businesses rely on banks for credit more than do large businesses. As a result, small businesses may be more adversely affected when adverse shocks, such as reduced bank capital or higher interest rates, reduce the supply of bank loans. The authors use annual, state level data for 1990-2000 to estimate: how much lower bank capital and higher interest rates affected businesses of various sizes, how much SBA-guaranteed loans cushioned small businesses in particular and the economy more generally, and whether the effects were larger during recessions and when interest rates were high.